Positioning Update: What Will Yellen Do?
The million-dollar question
Added a couple May 17 ‘24 SPX puts on Wednesday 1/24 as a starter position. More vol up, equities up and I’ll add to it as I see fit. Still aggressively long oil (CL 69.80) and closed the gold (GC) calls on Wednesday as well.
QRA estimates from the Treasury are due next week on 1/29, and the actual release is on 1/31. Remember, on 7/31 (QRA release), the bond issuance was massive relative to estimates and greatly contributed to downside in both bonds & equities. On 10/31, bond issuance was lackluster, and equities & bonds rallied aggressively. This was a major reason behind closing all of my short equity positions on Nov 1st, 2023.
That being said, the ATH crew has come out to play once again. The bear steepener — which has been the main driver of bonds + stocks since the July top — is presently on pause after Yellen’s stick save (QRA issuance), & the weak growth/labor market data. Bonds + stocks are still positively correlated (no bueno for risk), and FOMO is rising as the market looks past every mounting risk.
To clarify the Yellen stick save bit, the issuance was below expectations when the market was expecting more, resulting in a rally sparked by rates falling materially. So in an “unforeseen turn of events,” it was rates — yes the same rates that so many said didn’t matter for the first half of the year — that ignited this rally. This means that the long-term outlook has not changed at all whatsoever, while the short-term did so drastically. —
A visual of QRA’s effect on bonds & equities:
For clarification, I don’t have a clue what Yellen will do this time around, hence my position sizing being small for now. If she decides to issue more bills and maintain a lackluster note/bond issuance, then the punch bowl remains at the party. Thus, equities can continue rising. I entered puts because they are exceedingly cheap despite my incognizance in regard to the composition of the QRA.
The moral of the story is: Bond supply matters. If the next QRA consists of significant bond issuance, it’s very likely risk off for a bit. Definitely something to watch for given that it induced the fastest easing of FCI in history.
What will Yellen do? This is the million-dollar question.
Lastly, something else to watch for, especially if it continues — which I believe it will:
Oil is quietly outperforming the major indices YTD.
Thanks for reading.
Until next time,
Pierre.